A Two-Country Analysis of International Targeting of Nominal GNP

The paper starts by reviewing three sorts of obstacles to successful coordination: the
difficulties of, respectively, compliance, credibility, and certainty. It is argued that nominal-GNP-targeting may have a good chance of overcoming such obstacles. A two-county model is used to evaluate an internationally coordinated version of nominal GNP-targeting in the presence of domestic and/or foreign shocks to supply, money demand, and goods demand. In this simple framework nominal GNP-targeting comes out fairly promising, although it does not dominate alternative regimes (including global monetary targeting, global price rules or discretionary policy) under all circumstances. Simulation results based on the McKibbin-Sachs Global Model are in line with the theoretical findings.